Financial Markets, Monetary Policy, Fiscal Policy, Supply-Side Policies, & Globalisation Flashcards

Question

what are the factors to be considered when setting the bank rate ?

Answer 1

economic expansion (increases AD) & economic contraction (decreases AD)

Answer 2

- adjustments to the interest rates - quantitative easing

Answer 3

loans are cheaper → consumers borrow more → consumption increases

Answer 4

loans are more expensive → consumers borrow less → consumption decreases

Answer 5

buyers borrow more → asset prices increase → households with assets feel wealthier → consumption increases → AD increases → inflation increases

Answer 6

buyers borrow less → asset prices decrease → consumption decreases → AD decreases → inflation decreases

Answer 7

increasing interest rates

Answer 8

risky loans poor investments banking losses

Answer 9

high risk loans (lending credit to borrowers with poor credit histories, to buy largely inflated assets e.g. reason why housing crisis in 2007, and the Financial Crash in 2008) regulation violation (Banks can fail if they do not follow regulatory requirements or operate within the recommended guidelines) asymmetric information

Answer 10

the manipulation of government spending and taxation (revenue) to influence aggregate demand in the economy

Answer 11

aims to increase AD by: + reducing taxes + increasing government spending + subsidy's for firms can worsen the government budget deficit

Answer 12

aims to decrease AD by: - increasing taxes - reducing government spending - indirect tax on firms improves the government budget deficit

Answer 13

to help the government achieve their macroeconomic objectives (low and stable rate of inflation, economic growth)

Answer 14

*Income tax cuts can influence labour to be more productive *Tax cuts can encourage firms to increase output or be more entrepreneurial *Subsidies can lower costs of production in the industry, leading to higher output

Answer 15

Government spending is an injection and increases economic activity

Answer 16

Taxation is a withdrawal and decreases economic activity

Answer 17

are automatic fiscal changes that occur as the economy moves through stages of the business/trade cycle

Answer 18

there will automatically be lower tax revenue -due to the nature of progressive taxation - as incomes fall households are taxed less

Answer 19

there will automatically be higher tax revenue -due to the nature of progressive taxation - as incomes rise, households are taxed more

Answer 20

taxation sales of goods and services by govern met owned firms The sale of government owned assets (Privatisation)

Answer 21

daily payments required to run the government and public sector

Answer 22

investments in infrastructure and capital equipment

Answer 23

support firms correct market failure support poorer households correct government revenue

Answer 24

reduce the consumption of demerit goods redistribution of income (from rich to poor)

Answer 25

As income rises, a larger percentage of income is paid in tax

Answer 26

As income rises, a smaller percentage of income is paid in tax

Answer 27

through public sector borrowing - This borrowing gets added to the national debt (the cumulative total of past government borrowing which has to be repaid with interest)

Answer 28

a financial strategy to pay back national debt When governments borrow money from the private sector, they do so by selling bonds (treasury bills) to people who want to save. this leaves fewer funds in the private sector for firms to use, crowding them out of the market. if the government is borrowing lots of money the interest rates might increase, discouraging spending and investment in the private sector.

Answer 29

future generations will have to pay off the loans, which have a rising interest rate

Answer 30

to improve the long run productive potential of the economy, by shift the long run aggregate supply curve (LRAS) outwards.

Answer 31

- interventionist policies - free market policies

Answer 32

* long term growth * improving competition * increasing labour market flexibility * increase international competitiveness * increasing incentives * reduce structural unemployment through improving education and training

Answer 33

economic growth (higher real GDP) reduce labour costs reduce average price levels (reducing inflation)

Answer 34

education & training (higher skilled workforce reduces structural unemployment) lowering taxes on labour, reduces barriers to employment, reducing frictional unemployment

Answer 35

to free up markets, from government intervention. improve market incentives to increase long run aggregate supply

Answer 36

reducing income tax, leading to greater investment deregulation decreasing or abolishing the minimum wage to lower cost of production

Answer 37

Improved resource allocation: (increasing the productive capacity of an economy requires more efficient use of its resources, including labour) No burden on government budget: (with an emphasis on freeing up markets and allowing market forces to drive efficiency and resource allocation, there is no requirement for government spending)

Answer 38

distribution of incomes worsens time lags environment damage from infrastructure projects

Answer 39

to require government intervention in order to increase the full employment level of output.

Answer 40

gov spending on education and training gov spending on healthcare so that productivity improve promote competition subsidising the relocation of workers, to reduce geographical immobility of labour.

Answer 41

Improvements in living standards: (Improvements in Infrastructure can raise the quality of life for all citizens)

Answer 42

Costs: they are expensive to implement and are paid for using tax revenue - or increased government borrowing Time lags: due to their long-term nature, changes in government often result in changes to budgets and scope of projects and the end result may be less effective than it could have been

Answer 43

the increasing interdependence of world economies. involving free-trade

Answer 44

economies of scale technology improvement (easier and cheaper to communicate) increasing number of multinational corporations (attempt to take advantage of economies of scale) deregulation FDI Containerisation (cheaper to ship goods across the world)

Answer 45

improvements in technology and the speed of global connections have exponentially increased the level of interdependence nations

Answer 46

employment opportunities depletion of natural resources increased power of monopolies

Answer 47

increased trade increased captial

Answer 48

a company that has business operations in at least one country other than its home country

Answer 49

- medium of exchange - measure of value - store of value - method of deferred payment

Answer 50

without money transactions were conducted through bartering. (Goods and services were traded with other goods and services). But people did not always get what they wanted or needed, and the goods and services traded were not always of the same value. money allows for a double coincidence of wants (both parties want what the other party has to offer).

Answer 51

money has to hold its value to be used for payment. can be kept for a long time without expiring.

Answer 52

money provides a means to measure the value of different goods/services.

Answer 53

money can allow for debts and credit to be created.

Answer 54

the stock of currency and liquid assets in an economy. (includes cash and money in saving accounts).

Answer 55

a physical currency (notes coins), as well as deposits and liquid assets in the central bank.

Answer 56

includes the entire money supply. includes liquid and less liquid assets.

Answer 57

where liquid assets are traded. used to borrow and lend money in short term.

Answer 58

where equity and debt instruments are bought and sold. (stocks and shares)

Answer 59

. to facilitate saving . to lend to businesses and individuals . to facilitate the exchange of goods/services . to provide forward markets in currencies and commodities . to provide a market for equities (trading shares on stock market)

Answer 60

a stock or security which represents interest in owning an asset or firm.

Answer 61

There is an inverse relationship between market interest rates and bond prices. When a bond is bought, money is lent to the issuer. The issuer agrees to pay the value of the bond back when it matures, in addition to periodic interest payments. The rate of interest is fixed when the bond is issued. New bonds have rates close to the market interest rate. If the market interest rate falls, for example, the bond would be worth more, since it carries a higher interest rate than current market conditions. Similarly, the bond is worth less is the rate increases. This is because the bond has a lower interest rate than the current market.

Answer 62

to raise funding for large projects, such as to expand the firm, develop a product, move to a new premise, or takeover another firm. Bonds could be traded in a similar way to shares, and they are partially protected against variable interest rates or economic changes. However, the firm will have to pay the investors who buy the bonds interest. used in quantitative easing

Answer 63

Money lent to the issuer. The issuer agrees to pay the value of the bond back when it matures, in addition to periodic interest payments. The rate of interest is fixed when the bond is issued.

Answer 64

loans and long term bonds

Answer 65

to pay their debtors interest, wages and general expenses.

Answer 66

used by central banks to detail what the future monetary policy will be, with the intention to reduce uncertainty in markets. e.g. MPC stating that they will keep the interest rate at a certain level until a specified date.

Answer 67

unemployment rate savings rate consumer spending high commodity (e.g. price of oil increases, leading to cost-push inflation as its a commodity the UK import, leading to the MPC increasing the bank rate to overcome inflationary pressure) exchange rate (e.g A weak pound would cause the average price level to increase. This makes UK exports relatively cheap, so UK exports increase. Since imports become relatively more expensive, there would be an increase in net exports. The MPC might consider increasing the interest rate.).

Answer 68

an increase in interest rates in the uk, makes the uk more attractive to invest funds into, because the rate of return on investment is likely to be higher. this increases demand for the country, causing an appreciation in the pound for example. this is also known as hot money flows.

Answer 69

to ensure the behaviour of banks is clear to institutions and individuals who conduct business with the bank, to ensure there is ethical behaviour.

Answer 70

PRA (Prudential Regulation Authority) FCA (Financial Conduct Authority) FPC (Financial Policy Committee)

Answer 71

aim to protect consumers interests by regulating financial firms to ensure they are being honest to consumers. also aim to promote competition.

Answer 72

promotes the safety and stability of banks, building societies, investment firms, and credit unions, to ensure policyholders are protected.

Answer 73

regulates risk in banking and ensures the financial system is stable. it clamps down on loose credit in particular.

Answer 74

its where credit is lended with very relaxed criteria, making credit easier to acquire.

Answer 75

a situation where there is a risk that the borrower do things that the lender would not deem desirable, because it makes the borrower less likely to pay the loan. usually occurs when there is some form of insurance for the mistake. e.g. if a house is insured, a borrower might be less careful because they know any damage caused will be paid for by someone else.

Answer 76

may offer risky loans and take more risks because they know the Bank of England or the government can help them if things go wrong. e.g. The financial crisis has been regarded as a moral hazard, due to the degree of risk taking.

Answer 77

the risk of damage to the economy or the financial market. e.g. the risk of a bank collapsing, as this costs firms, consumers, the economy, and the market, creating a negative externality.

Answer 78

to determine how able a company is to pay off short-term obligations. higher the ratio, greater the safety margins of the bank.

Answer 79

to assess the ability of the banks to take on more risks, and the financial strength., through assessing a banks level of credit borrowed.

Answer 80

it collects payments to the Government, and makes payments on behalf of the Government. manages public debt and issues loans.

Answer 81

a bond issued by governments to support Public Spending.

Answer 82

- depreciation of its currency on FOREX markets due to reduced interest rates. leading to less investment and hot money flows into the economy. Although this makes exports cheaper, imports become more expensive, and because the UK imports a lot of raw materials from overseas, it could trigger cost-push inflation .

Answer 83

. The government could reduce income and corporation tax to encourage spending and investment. . The government could subsidise training or spend more on education. This lowers costs for firms, since they will have to train fewer workers. Spending more on healthcare helps improve the quality of the labour force, and contributes towards higher productivity. . Governments could spend more on infrastructure, such as improving roads and schools.

Answer 84

the accumulation of the government budget deficit overtime.

Answer 85

taxes imposed on income.

Answer 86

taxes imposed on the expenditure on goods/services, increasing the cost of production for firms. . AD valorem (a percentage, e.g. VAT) . specific taxes (set tax per unit)

Answer 87

fixed tax rate for everyone, regardless of incomes.

Answer 88

- governments might have imperfect information about the economy, leading to inefficient spending. - there is a significant time lag involved with employing fiscal policy, it could take years or months to have an effect

Answer 89

spending which recurs. e.g. spending on goods/services which are consumed and last for a short time. (spending on prescribed drugs for the health service)

Answer 90

spending on assets, which can be used multiple times. e.g. expenditure on roads or building a school

Answer 91

welfare payments from the government. they aim to provide a minimum standard of living for those on low incomes. means to redistribute income from rich to the poor and reduce inequality. e.g. Job seekers allowance (JSA), Child support

Answer 92

the government might have ti raise interest rates, to encourage investors to buy bonds, so they can finance the debt. could lead to higher taxes, and periods of austerity.

Answer 93

. progressive tax system and welfare payments . government spending on housing, public services such as education and healthcare, providing equal opportunities for everyone regardless of their economic background.

Answer 94

a temporary deficit, related to business cycle. (e.g. deficit in a recession)

Answer 95

- fiscal deficit could be inflationary - could lead to crowding out, less investment and consumption - increased interest rates

Answer 96

The cost of borrowing could increase, since by borrowing money, the government is increasing demand for credit in the economy.

Answer 97

.The OBR provides analysis of the UK’s finances. .They produce 5-year forecasts for the economy, including the impact of tax and spending changes announced in the Budget. .They judge the government’s performance against its fiscal targets. These are to balance the budget 5 years ahead and have net public sector debt falling in 2015-16. .They assess the likelihood of the government meeting the targets. .They scrutinise tax and welfare spending measures. .They also assess how sustainable public sector finances are in the long run.

Answer 98

interdependence between economies

Answer 99

The growing strength and influence of organisations such as the World Trade Organisation (WTO), which advocates free trade, has contributed to the decline in trade barriers.

Answer 100

. trade imbalance between countries (e.g. USA runs a large current account deficit with China) . inequalities in consumers and countries access to health, education, and markets . loss of cultural diversity, if there is a widespread of culture across the globe

Answer 101

some governments might lose their sovereignty due to increase in international treaties. (may have to abide by the rules of organisations that several countries are members of)

Answer 102

+ consumers and producers can earn benefits of specialisation and economies of scale as firms become larger. + firms operate in a more competitive environment, encouraging them to be more efficient reducing their AC + Globalisation leads to a general increase in world GDP, leading to increased living standards

Answer 103

+ increased employment across the globe and their home country - structural unemployment, due to firms developing more efficient production processes using automation and machinery.

Answer 104

- pollution through increased production and car use - depletion of natural resources (deforestation, water scarcity) - increased consumer awareness about environmental sustainability

Answer 105

maturity date (payback date) of less than 1 year (< 1 year). e.g. bonds, bank lending

Answer 106

maturity date (payback date) of greater than 1 year (> 1 year). e.g. bonds, shares

Financial Markets, Monetary Policy, Fiscal Policy, Supply-Side Policies, & Globalisation Flashcards

(131 cards)